EMEA Weekly Czech President Klaus to look for new governor

Polish macro data in focus

Focus will very much be on Polish macro data during next week. Most interesting will be labour data, retail sales and industrial production. The Polish manufacturing sector continues do quite well with year-on-year growth in industrial production close to a double-digit number. However, recently Polish policy makers have voiced some concerns about the strength of the zloty. It will therefore be interesting to see whether the strengthening of the zloty has hit industrial production when we get the March numbers next week. We do not think so, but nonetheless we see a small downside surprise on the numbers (we expect March’s IP to increase to 9.4% y/y, consensus 10.0% y/y).

One of the major positive surprises in the Polish economy over the past year has been how well Polish private consumption has done taking into account the worsening of labour market conditions and the tightening of credit conditions. We think the biggest risk to the Polish recovery this year is that the Polish consumer might finally give in to the pressures from especially the continued worsening in labour market conditions. Next week's retail sales numbers might provide some answers. We expect March retail sales at 3.6% y/y, up from February’s 0.1% y/y but lower than consensus 4.2% y/y.

Even though we expect to see some improvement in the Polish labour market in the coming year the overall picture remains the same - below-trend growth keeps labour demand weak. Therefore we also expect Polish unemployment to continue to rise all through 2010. We expect the March unemployment to confirm this trend and rise to 13.2% up from 13.0% in February.

Fidesz victory lifted Hungarian markers

On Sunday the conservative Fidesz won a landslide victory in the round of voting in the
Hungarian elections. The good result for Fidesz has been received very positively by the
fixed income markets with Hungarian market rates and yields dropping significantly
during the week. The downward trend in Hungarian yields got further momentum after
dovish minutes from the latest Hungarian Monetary Council meeting were published on
Wednesday (read more on the minutes in our Daily).

Even though we agree that the strong results for Fidesz reduce the political risk in Hungary, we do not think the announced policies of Fidesz are necessarily that positive for the Hungarian fixed income markets. Fidesz has announced that it will cut taxes to stimulate growth and even though a lowering of the level is warranted from a structural perspective, it raises some concerns about the outlook for public finances in Hungary. However, for now it looks like fixed income investors are giving Fidesz the benefit of the doubt, but if investors start to question how Fidesz plans to fund the planned tax cuts Hungarian yields could shoot up once again. Currently we only see little risk of that happening and the bulls are likely to remain in majority in the Hungarian fixed income markets in the near term.

Not only in Hungary but also in Turkey market rates and yields fell over the week as the Turkish central bank (TCMB) MPC meeting turned out more dovish than some of the market participants including us had expected. The statement from the MPC meeting clearly said that interest rates should be kept low for some time. Taking that into consideration we have moved the first rate hike into H2. Read more in our flash comment here.

On Thursday the Czech governor Zdenek Tuma unexpectedly announced that he will step down on 30 June - before his official mandate ends. Read more in our flash comment here.